Consumers have a lot of anxiety about using credit cards. Questions range from “How much should I charge each month?” to “Should I even have a credit card?”. Like most financial products, credit cards need to be used responsibly. And to do that, you need to know the facts- not myths!
The following popular myths about credit cards could be hurting your wallet as well as your credit score. Do yourself a (financial) favor and ignore them.
1) You don’t need a credit card. Debit and prepaid cards work just as well.
Many people automatically assume that using a credit card will lead to uncontrollable debt. And for consumers who don’t know how to handle credit cards responsibly this can certainly result in having maxed out credit limits. But for people who understand that a credit card isn’t a blank check (that is, you only charge what you can afford to pay off each month), credit cards offer a simple way to establish and build a solid credit history. Debit and prepaid cards do work in much the same way as credit cards (without any rewards or benefits) but there is one big difference- neither of these types of cards reports to credit bureaus. So using them has zero effect on your credit history or score.
2) Carrying a balance on your credit card improves your credit score.
How to put this simply? No! You should pay your credit card bill on time and in full each and every month. If you find you can’t pay the full amount for whatever reason- always pay the bill on time and try to pay more than the minimum amount due. Making a late payment (even by one day) can seriously damage your credit score (as well as choke you with late fees and penalties). Consistently carrying a high balance on your credit card lowers your score. It may also indicate that you’re spending is out of control. Pay attention to the warning signs. Remember- only charge what you can comfortably afford to pay off each month.
3) One credit card is enough.
See Myth #1. This goes back to the theory that having a credit card in your wallet equals instant debt. (Occasionally true for some but certainly not the norm.) Recent studies have found that the average household that utilizes credit cards has four. You may have various cards that offer different rewards. Again, the key is proper management and usage. Paying the entire balance on time each month (for however many accounts you have) is the most important thing. Make sure you don’t get overwhelmed chasing rewards or cash back.
4) Never accept a credit line increase.
Credit card issuers routinely review cardholders’ accounts and sometimes offer a credit line increase to members who have a history of on-time payments (and maintaining low balances). Are they trying to get you to spend more? Of course they are. They make huge profits off of interest charges and other fees. But you can actually use a credit line increase to your advantage. Here’s how: Credit utilization makes up 30% of your FICO score. If you have a credit card with a $2,000 credit limit and you spend $1,000 a month- that’s a 50% utilization rate. But if your issuer offers an increase to $3,000 your utilization will be about 33%. The more you lower your utilization, the more your credit score will move up.
One important note: Accepting a credit line increase only works in your favor if you don’t actually use the extra credit available!